ATR Stop Loss Strategy For Crypto Trading
What Is ATR In Crypto
Average True Range (ATR) is a technical indicator used for trading in the financial markets to measure the level of price volatility for a given financial asset over a specific period of time. The ATR was developed by J. Welles Wilder Jr. in his 1978 book, “New Concepts in Technical Trading Systems”.
The value of the ATR indicates the volatility of the crypto. A high ATR indicates higher price volatility and larger price swings of the crypto. A low ATR indicates lower price volatility and smaller price movements of the crypto.
To calculate the ATR, these are the values you will need:
Current Price High: The highest price of the crypto during the given trading period.
Current Price Low: The lowest price of the crypto during the given trading period.
Previous Price Close: The previous closing price of the crypto.
The ATR is calculated by taking the greatest of the following three key values:
- Current Price High minus Current Price Low
- The absolute value of the Current Price High minus the Previous Price Close (always give a positive value)
- The absolute value of the Current Price Low minus the Previous Price Close (always give a positive value)
For example, given that the current price high, current price low, and previous price close is $30, $20, and $25 respectively. The current price high minus the current price low would be $10 ($30-$20), the current price high minus the previous price close would be $5 (|$30-$25|), and the current price low minus the previous price close would be $5 (|$20-$25|). The ATR would be the greatest value of the three which is $10 in this example.
The ATR is typically calculated over 14 days or 14 periods. Traders can use different settings to find intraday, daily, weekly, or monthly values or even different periods such as 10 days or 10 periods based on their trading strategies and timeline.
The ATR can be used for a variety of purposes such as:
- To identify breakout opportunities. When the value of the ATR expands, it can indicate that the crypto is breaking out.
- To determine the appropriate stop loss and take profit levels. The ATR helps traders measure the volatility of the crypto before taking a trade, allowing them to make informed decisions before putting on a trade.
How To Use ATR As Stop Loss In Crypto Trading
Stop losses are advanced orders that traders place with brokers to buy or sell a crypto once it reaches a particular price point. Once the price of the crypto reaches that predetermined price point, the stop loss order becomes a market order that is executed automatically.
With stop losses, crypto traders can plan their exit points and the risks that they are willing to take on before they even put on their positions, allowing them to manage their risk and limit their potential losses on any given trade.
Stop losses, like any other trading tools or indicators, have their advantages and disadvantages. While they can help traders limit their potential losses, setting stop losses too tight and close to the current market price could result in traders exiting their positions prematurely before prices have had a chance to move in their favour.
Stop losses can cause unnecessary losses during market fluctuations. These price fluctuations are common in the crypto markets and setting too tight of a stop loss can result in “whipsaws”. Traders’ stop losses get triggered after which the market reverses, and they miss out on potential profits.
ATR can be a valuable tool when it comes to setting stop-loss orders in trading as it helps traders determine appropriate risk levels for their positions based on the current volatility of the crypto. Instead of setting stop losses based on an arbitrary level, traders can use the ATR of the crypto and set their stop losses close enough to limit any potential losses but far enough to account for normal price fluctuations of the crypto.
ATR Stop Loss Calculator
For Excel and Google Sheet lovers, here are the formulas that you can use to calculate the ATR of the crypto and set your stop losses accordingly.
Step 1: Input the values of the current price high (CPH), current price low (CPL), and the previous price close into the Excel/Google Sheet.
Step 2: The formula to calculate the CPH – CPL is:
=B2-C2
Step 3: The formula to calculate the absolute value of the CPH – PPC is:
=ABS(B2-D2)
Step 4: The formula to calculate the absolute value of the CPL – PPC is:
=ABS(C2-D2)
Step 5: The formula to calculate the ATR is:
=MAX(E2:G2)
ATR Trailing Stop Loss Strategy For Crypto Trading
A trailing stop loss is a variation of the traditional stop loss order that adjusts itself automatically as the cryptocurrency’s price moves in a favourable direction. It allows crypto traders to lock in profits when prices rise while allowing room for price fluctuations.
As the crypto price moves in the favor of the trader, the trailing stop loss moves up (for long positions) or down (for short positions) by a specified trailing percentage or amount, in this case, the ATR of the coin. The trailing stop loss will follow or “trail” the price at a predetermined fixed ATR.
If the crypto price experiences a reversal or pullback, the trailing stop loss remains at its last adjusted level. For a long position, the trailing stop loss will only adjust upwards and will not adjust downwards. For a short position, the trailing stop loss will only adjust downwards and will not adjust upwards.
For example, if the trader decides to set a trailing amount based on the ATR of the crypto which is $10, the stop price will move up $10 below the highest price reached since the order was placed for a long position. The converse is true for short positions.
If $150 was the highest price reached since the trailing stop loss order was placed and prices have moved up to $170, the trailing stop (for a long position) will also move up from $140 ($150-$10) to $160 ($170-$10). But if prices fall from $170 to $165, the trailing stop will remain at its current price of $160 and it will not adjust downwards.
Using a trailing stop loss based on the ATR of the crypto allows traders to ride profitable trends during an upward move while protecting against potential reversals and allowing room for price fluctuations.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service.
Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.